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§ 9.3 INVENTORYIn general, the amount of the charitable deduction for contributions of propertyis measured by using the fair market value of the property. 33 When a corporationmakes a charitable contribution of property out of its inventory, however,the gift deduction is generally confined to an amount that may not exceed thedonor’s cost basis in the property. 34 That is, the amount that might otherwise bedeductible must be reduced by the amount of ordinary income that would haveresulted had the items been sold.Nevertheless, a special rule provides an augmented deduction under certaincircumstances, pursuant to which the charitable deduction for contributions ofinventory may be an amount equal to as much as twice the cost basis in theproperty. 35 These gifts of inventory are known as qualified contributions. 36(a) Basic RulesThe charitable contribution deduction for a gift of inventory generally must bereduced by an amount equal to one-half of the amount of gain that would nothave been long-term capital gain if the property had been sold by the donor atfair market value at the date of the contribution. 37 If, after this reduction, theamount of the deduction would be more than twice the basis in the contributedproperty, the amount of the deduction must be further reduced to an amountequal to twice the cost basis in the property. 38This augmented deduction is available under the following circumstances:1. The gift is of property that is Stock in trade of the taxpayer or other property of a kind that wouldproperly be included in the taxpayer’s inventory if on hand at the closeof the tax year, 39 Property held by the taxpayer primarily for sale to customers in theordinary course of the trade or business, 40 Property, used in a trade or business, of a character that is subject to theallowance for depreciation, 41 or Real property used in a trade or business. 422. The donor is a corporation (other than a small business corporation). 433. The donee is a charitable organization. 4433 IRC § 170(e). See § 4.3.34 IRC § 170(e)(1)(A).35 IRC § 170(e)(3); Reg. § 1.170A-4A(a).36 IRC § 170(e)(3)(A).37 Reg. § 1.170A-4A(a). In the only case in point, a court held that four-day-old bread donated under these rulescould be valued at full retail value, rather than utilizing the 50 percent price discount used in the industry forbread removed from the shelves after three days. Lucky Stores v. Commissioner, 105 T.C. 420 (1995).38 Reg. § 1.170A-4A(a).39 IRC § 1221(1).40 Id.41 IRC § 1221(2).42 Id.43 This type of entity is known as an S corporation. IRC § 1371(b).44 That is, an organization described in IRC § 501(c)(3). 273